Selloff's Reach Extends
Deeper Into Asia Markets

Steep declines across Asian stock markets Thursday underscored a rare turnabout: Emerging markets are on the receiving end of this global market contagion, rather than starting it.

Growing concerns over a global credit crunch continued hammering away at Asian markets. Central banks again stepped in to defend their currencies from more damage, although the yen continued to strengthen.

South Korea's stock market, closed Wednesday for a holiday, was hit hard, with the Kospi Composite falling 6.9%. The Bombay exchange's Sensex ended Thursday 4.3% down at 14358.21 after holding steady on Wednesday. Indonesia's JSX Composite Index fell 5.9%, bringing its loss for the past two days to 12%.

Asia's major markets also have been infected. Japan's Nikkei Stock Average of 225 companies fell 2% to 16148.49 on Thursday, for a two-day drop of 4.1%. In Hong Kong, the blue-chip Hang Seng Index fell 3.3% to 20672.39. Its two-day drop is 6.1%. Australia's S&P/ASX 200 fell 1.3% at 5711.50, down 4.2% in the past two days.

Sellers in Asia took their lead from U.S. markets, which fell for the second-straight session Wednesday over troubles faced by home lender
Countrywide Financial Corp.
and
KKR Financial Holdings
LLC, a real-estate investment trust that said it will take a $40 million loss on a sale of home-mortgage loans. Countrywide was downgraded to "sell" by Merrill Lynch, and traders said market demand for its short-term financings had fallen sharply. The Dow Jones Industrials dropped 1.3% Wednesday to 12861.47, their first close below 13000 since April 24. In early afternoon trading Thursday, the benchmark was down 305.32 points to 12556.15.

Emerging markets are better known for creating debt crises than for weathering them: the Mexican peso run of 1994, for example, and the 1998 collapse of the Russian ruble. Russia's problems rippled across other markets and helped bring down Long-Term Capital Management, a major hedge fund.

But this time market volatility is radiating out from the U.S., where questions about the creditworthiness of subprime loans -- those made to people with a poor credit history -- have now extended into a credit crunch that is affecting the broader market.

Just recently, emerging markets from Mexico to Korea have been enjoying the fruits of a remarkable decade spent getting their financial houses in order.

Years of trying to squeeze down budget deficits coupled with a commodities boom has put economies like Mexico and Brazil on sound financial footing. Another key has been expunging what Venezuelan economist Ricardo Hausmann famously called the "original sin" of Latin American governments: borrowing abroad in dollars -- a problem that also crushed Asia in the 1990s when a decline in local currencies made the debts costlier to repay.

Investors in South Korea check stock prices at a securities firm in Seoul.

Together, these factors have helped protect these countries from some of the worst fallout of the credit turmoil in the U.S. and Europe. Bonds issued by emerging-market governments and companies have held up better than similarly rated debt from borrowers in developed markets. While emerging-market debts' yield premiums over U.S. Treasurys have widened, the changes are moderate compared with the blowup in U.S. junk bonds.

But cracks in the performances of emerging-markets assets and others with high yields are now starting to widen, with stocks, bonds and currencies all hurting.

The New Zealand dollar Thursday slid below 70 U.S. cents for the first time since mid-March as traders continued to unwind carry-trade positions. In the carry trade, investors borrow in a low-yielding currency such as the yen to purchase assets in a higher-yielding currency. Repayment of yen loans, meanwhile, is pushing the yen higher. On Thursday, it continued ascending to new highs for the year against the dollar and the euro -- 112.61 yen to the dollar and 150.85 yen to the euro.

Currencies elsewhere in Asia fell. Traders in Australia, Malaysia and Singapore said that central banks likely intervened in all three countries to stem the damage. In Indonesia, Bank Indonesia confirmed it had intervened.

Both the Reserve Bank of Australia and the Bank of Japan injected fresh funds into their domestic money markets to ensure liquidity.

In Australia, the stock of subprime casualty RAMS Home Loans Group Ltd. plunged on its announcement that rising costs of funding due to volatile credit markets will hurt its earnings for this financial year. After being down more than 55% at one point, they ended the day down 36% at 86.5 Australian cents (71 U.S. cents).

As subprime-credit woes spread, Asian companies are starting to sideline their fund-raising plans. So far, most of the impact has been on smaller deals. But in a sign the pace is picking up, four Australian firms and two Indian companies backed away Thursday from acquisition or share-offer plans, citing the volatile markets.

In Australia, K2 Asset Management Holdings Ltd. called off its A$33 million (US$27.1 million) initial public offering and
Hyperion Flagship Investments Ltd.
HIP -5.00%
suspended plans for a capital raising of up to A$30 million. In New Zealand, AMP Capital Investors, a unit of Australia's
AMP Ltd.
AMP 1.75%
, canceled the planned IPO of its Summerset Group, a retirement-village operator it owns. And Australian property-trust and investment-management company City Pacific Ltd. said Thursday that suitor MFS Ltd. has called off takeover talks due to market volatility.

The global market turmoil has forced Indonesian companies with poor credit histories to pull planned bond issues over the past couple of weeks. Golden-Agri Resources Ltd., a plantation company controlled by Indonesia's Widjaja family, said earlier this month that it was postponing a planned $400 million convertible bond issue and was looking at other sources of financing such as bank loans.

The Widjajas also own Asia Pulp & Paper Co., which in 2001 was responsible for a US$13.9 billion default, the largest ever for an emerging market -- some foreign creditors are still trying to get their money back. Until recently, Widjaja family companies were unable to tap global markets. But in April, rising appetite for risk allowed Singapore-listed Golden Agri to raise $540 million through a share placement.

Other Indonesian companies have had to scale down fund-raising plans. Mobile-phone operator PT Mobile-8 Telecom last week sold $100 million in dollar bonds, below its initial target of $150 million. The company also said it had to raise the coupon to 11.25% from an initial 9.75% due to the market turmoil.

The exception -- so far -- has been Chinese companies listing in China.

So far, "we haven't seen any transactions canceled or pulled in the China or Hong Kong markets," said
Marshall Nicholson,
managing director and head of equity capital markets at BOC International, the investment-banking arm of the Bank of China. However, he added, a firm pricing a transaction in the next two or three weeks "may have to adjust the price."

Officially, China has shrugged off concerns the global credit crunch could hit home. In fact, the People's Bank of China has pushed to tighten financial conditions. In the third such action this week, the central bank plans on Friday to freeze funds worth about US$13 billion in the banking system by selling three-year bonds.

Financial flows remain high by several other measures, including a stock market that has hardly paused from its successive climb to records. While the Shanghai Composite Index has fallen for two straight sessions -- by 2.2% in all -- it remains up 78% for the year.

—Mohammed Hadi, Tom Wright and James T. Areddy contributed to this article